A Basic Understanding
of the Forex Market
What is Forex?
Definition: The Foreign Exchange
Market, also known as the Forex, or FX
market, is a decentralized marketplace
facilitating the buying and selling of
different currencies. The sales, or trades,
take place over the counter (OTC).
Basic Understanding of Forex
Where can you Trade Forex?
The Forex market is a decentralized market
because there isn’t one physical location where
investors go to buy and sell currencies.
It is also an OTC (over the counter) market,
because the buying and selling is not limited to
one of the major exchanges, but rather a network
of banks and their brokers.
Basic Understanding of Forex
When can you Trade Forex?
The Forex market is open 5 days a
week, 24 hours per day.
Some times are better than others for
trading because the liquidity is higher. This
means that there is more trading and the
price moves more.
Basic Understanding of Forex
Market Times
UTC TIMES
Basic Understanding of Forex
Who Trades Forex
There are two general types of traders:
1.
Hedgers: These are big conglomerates that look to
buy and sell currencies in an effort to reduce their
exposure to foreign currency movements.
2.
Speculators: In contrast to hedgers, who are
buying and selling currencies to avoid risk,
speculators are seeking opportunities to profit from
the volatility and price movement of the market.
Basic Understanding of Forex
Types of Speculators
Big Banks, facilitating transactions for their clients, account for a large
volume of the currency traded in the market.
Central Banks When central banks purchase or sell securities in the
open market, called Open Market Operations (OMOs), and changes in
interest policies greatly affect the forex market.
Hedge Funds and investment managers, many of whom have a large
international portfolio, move large portions of funds in the market
Retail Traders These are the individual investors and traders who
make up an almost insignificant portion of volume in the forex market.
Basic Understanding of Forex
Why Trade Forex?
●
Size of the Market / Liquidity: There’s always a buyer in the forex
market.
●
Low Transaction Costs: Typically forex brokers make their money
on the spread, whereas equity markets also take a commission.
●
Low Spreads: The spreads in the FX market are extremely low due
to the great liquidity of the market.
●
More Profit Opportunities: Traders can open speculative
positions to buy or sell, even before buying.
●
High Leverage Trading: Traders don't need to pay the full cost of
the trade, as brokers will lend them the balance.
Basic Understanding of Forex
Buying and Selling
How can I sell something that I don’t own?
I never bought it, so how can I sell it?
The simplest answer is that you’re borrowing the item that
you’re selling and then selling it.
Example: You borrow some Euros to buy Dollars. When you
buy the Dollars, you’re also selling the Euros that you
borrowed. If the value of the Euro goes down while you’re in
possession of the dollars, then you can pay back the loan of
Euros by paying fewer dollars.
Basic Understanding of Forex
Leverage and Margin
A margin requirement is the amount of money
required to open a leveraged trade.
Leverage and margin are closely related because the more
margin that is required to place a trade, the less leverage
traders will be able to use. The trader will have to fund more of
the trade with his own money, borrowing less from the broker.
Basic Understanding of Forex